Fri, 4 Nov 2011
The slow-recovering employment market will need a boost from housing construction and a realignment of worker skill sets to get back to full health, say Morningstar's Bob Johnson and Vishnu Lekraj.
Jason Stipp: I'm Jason Stipp for Morningstar.
The government released its employment report for October. 80,000 jobs were added to the economy. This was about in line with expectations.
I am checking in with Morningstar's Bob Johnson, director of economic analysis, and Vishnu Lekraj, who covers the employment sector, to get their take on the report and what might be some drivers for the employment market looking ahead.
Thanks for joining me, guys.
Bob Johnson: Great to be here.
Vishnu Lekraj: Thanks.
Stipp: Vishnu, I see that you have a pen and pad out here. Are you going write home about these results?
Lekraj: These results are in line with what everyone expected. They weren't necessarily stellar, but they weren't overly negative. They fell in line with my range and Bob's range. They fell in line with market consensus for the most part.
Everything was pretty flat. The usual characters were the big gainers: health care, education, temp help, and, as we expected, retail was a big gainer this month because of seasonal hiring.
Johnson: And the one negative was construction.
Lekraj: Construction, correct.
Johnson: ... we lost 20,000 jobs, which has a little bit to do with seasonality. But that was probably the biggest negative in the report. And manufacturing, which has been a real big gainer for many months, slowed the last couple of months at least.
So the employment growth from the manufacturing side, which was so important earlier in the recession, has slowed a little bit. So that's another key trend.
Stipp: So we did see some revisions too, August and September, which were pretty significant although we're still talking about pretty low numbers. What do you make of that?
Lekraj: The revisions ... look positive on the surface, but when you look back at what they actually did, ... they revised [down] the losses in local government. They didn't necessarily add any jobs to any categories. What they stated was local governments didn't fire as many people as they thought they did. Which is a positive, but it wasn't necessary job gains in any of the other categories.
Stipp: So Bob, we had a revision in August from 57,000 to 104,000.
Johnson: Yes, basically doubled...
Stipp: And in September, 103,000 to 158,000, but now we're saying that we have 80,000 in [October]. So are we seeing now a better trend than we thought over the late summer, and now we're slowing down again? What do we make of this?
Johnson: Well, I think people have to be really cautious, and I think we've got to get off this game of watching the number every month and saying it's going to 75,000 or 76,000. Remember the base we're comparing this against is a 130 million jobs. It's a huge number. What we gain and lose each month is practically a rounding error.
And if you are going to look at the employment numbers on a monthly basis, I think there is a great way to look at them, and that's you take a moving average of three months, and that takes things out like the Verizon strike or bad weather or something happened. So if you compare three months last year to three months this year, and figure out what's happened, that's the right way to look at the numbers, and on that basis for six months in a row, we've gained about 1.7% in terms of employment, which equates to about 1.8 million jobs or so. So it's a number that has been relatively consistent; it's not as good as we like to see, and it's not as big as we need. But keep in mind, we have productivity gains, so a 1.7% employment gain should translate into at least 2%-2.5% GDP growth. So I am pleased with the numbers. When you look at them on that basis, we continue to move along at a slow but steady pace.
Stipp: Vishnu, you mentioned yesterday that we've been seeing consistent but very slow growth in the employment market, and you said if it keeps up at this pace that the unemployment rate would start to tick up. But we actually saw it edge down a little bit. What's behind that?
Lekraj: Well, the participation rate stayed steady. There are more jobs out there in terms of the household survey, which is a positive thing. But again, what Bob said, you can't look at it on a one-month trend. It's such a dynamic market, that you have to look at it over a few months, and if you look at it over the next six to 12 months, if you keep on the same pace in terms of job growth, there is no doubt that the unemployment rate will go up. Again, we need at least 200,000 for that to be even a good positive.
And the Fed came out with the revisions to their estimates back in June, where they estimated where the unemployment rate would end up by the end of 2013. And initially they stated that it would be between 7.5% and little bit over 8%. But now they've revised that up, and they are stating implicitly that job growth from here until the end of 2013 is going to be a lot lower than what they thought.
Stipp: So now even the Fed is weighing and saying it's going to be slow growth.
Bob, I want to ask you a question about the long-term unemployed. So this is a figure that we actually saw some improvement in, in October, but we still have about 42% of the unemployed that are in that long-term bucket. What does this imply about the health of the labor market. It still seems like a pretty high rate for people who have been out of work for so long?
Johnson: I am afraid that for some of those people in that pool, the reason that number has gotten better is they just dropped out of the workforce. And one of the ways we can look at that and get a little window on that is, the number of people that are actually collecting unemployment. And that number has moved from a recession high of about 12 million people down to between 6 million and 7 million. So the number of people actually on the unemployment rolls has been cut in half, and I assure you, we haven't had 6 million job gains in the economy. So a lot of people have dropped out, if you will, because they've hit their 99 weeks. And some of those people aren't, obviously, continuing to look for jobs. And I think that's part of the reason the unemployment rate has come down. It's not a good reason for it to come down, and that's why I think the Fed is wrong. I think the unemployment rate is going to come down a little bit more. I think people are going to realize, I've got to go back to school, or I've got to drop out of the work force, or I've got to move. I think that we are not going to sit in a steady state where you've got a bunch of people that are discouraged and just sitting there on the rolls and contributing to the unemployment rate.
Stipp: Vishnu, this long-term unemployment, it seems like a structural issue. What implications do you think this has on the recovery of the market, and what needs to happen to help these folks who have been out of work for so long?
Lekraj: I did a research paper last month on this, and I looked at the people that were let go during the recession versus folks that are currently employed. And there are two employment markets right now. One is the market for current workers, currently employed workers, is pretty strong, but the one for the people that are unemployed is very, very weak, and most likely will stay so. The industries that were hit especially hard during the recession are probably not going to grow robustly over the next five to 10 years, which may lead to some very, very tough and uncomfortable situations for certain people.
However, I don't want to be overly negative with this report. This report is pretty flat. But there are some positives out there. The temporary labor and employment services firms have reported positive growth, and there are some underlying trends for currently employed workers that are very highly positive.
Stipp: One thing you look at, I know, is retail. Retail added jobs in October. Do you think this could be an area at least for shorter-term strength?
Lekraj: Of course, over the next two, three months, it's going to be a good catalyst for a little bit of a boost into the employment market for holiday season hiring. But again, retailers are very cautious. They want to put through profitability per square foot. So it all depend upon prices and things of that nature.
Johnson: I'm optimistic longer term on the construction industry. I come back to this again and again. Probably somewhere between a third and a half of all jobs lost--of 8 million jobs we lost--were in construction, and obviously those numbers are continuing to come down, and this month's number in construction was frankly another disaster. We lost 20,000 [construction] jobs this far into the recovery. It's kind of unprecedented. This recovery would have been far stronger even if we had the construction industry just not go down, and so that's really held us back. I think that at some point--one can argue whether it's next year or it's three years from now--but we are producing houses at about the third of the rate that we really need to keep it going long term. Short term, we've got inventory issues, but long term, I think there is a way out of this, and the numbers aren't as bleak as the Fed is painting.
Stipp: So Bob, long term, there may be some bright spots. Did you see anything that could be a catalyst to break us out of this [current] 100,000 to 150,000 job gains month over month?
Johnson: Well, certainly not in this set of numbers, to be honest with you. What we have to see is construction get better, and that didn't happen.
But I'm encouraged. We've gotten so focused, and the government presents the data by industry, so we all analyze it that way. But I think the employment data is very interesting if you looked at it by category of worker. If you are an engineer, almost no matter what your field, you can write your own ticket right now. There is a shortage of engineers, a shortage of some computer people, not all, but ones with the skills that people are really desiring. The issue is that there is a mismatch in skills, and that's contributing to the problem.
Stipp: Vishnu, are we going to be able to train people up to take these jobs, or is this going to be an issue that persists for a while?
Lekraj: That's a longer-term dynamic. We touched on this last month. It's going to take maybe the better part of a decade to even see some material movement within that factor.
But near term, we touched on this in the last video, is that businesses have a lot of cash and as soon as the consumer starts to spend more robustly, and we see a little bit of an uptick, hopefully they can deploy this cash and employ some more people.
Stipp: All right, Bob and Vishnu. Thanks so much for joining me today and for your insights on this report and also for some of the trends that could be affecting the labor market in the future.
Lekraj: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.